(SINGAPORE) Singapore's purchasing managers' index (PMI) reading for September, released yesterday, fell to 50.6 from August's 54.4, a sharper slowdown in manufacturing expansion than had been expected.

After July and August's strong industrial production, most economists have raised their growth forecasts for Q3 gross domestic product (GDP), for which the government will release advance estimates next Monday. They also expect an upward revision in the current official full-year growth forecast of a 4-6 per cent contraction. But growth momentum is widely expected to slow - a trend which the latest PMI reading might attest to.

Economists whom BT spoke to agreed that some pullback in manufacturing was inevitable, given the sharp run-up in previous months. And despite the fall, the PMI reading of 50.6 is still above 50, indicating expansion. But the magnitude of the slowdown could be cause for concern.

Standard Chartered economist Alvin Liew said that the PMI decline, attributed to fewer new export orders and a smaller increase in new orders, suggests that 'external demand for exports remained weak, despite the fact that we are already in the Christmas shipment period'.

'It also suggests that the inventory restocking may be almost completed for the latest cycle while firms are not seeing a sustained return in demand,' he added.

Janice Ong, executive director of the Singapore Institute of Purchasing & Materials Management which compiles the monthly PMI, said that anecdotally, 'local manufacturers were cautious in managing their business activities but were anticipating a surge in order demands, particularly during the festive seasons towards the end of the year'. This, she said, resulted in the expansion of the overall input prices' index for the first time after 10 straight months of contraction.

Singapore's PMI is coincident with manufacturing a couple of months ahead, noted Selena Ling, an economist with OCBC. This could point to a post-Christmas dip in production, which would not be a departure from the norm anyway. Still, she thought that 'manufacturing growth may lose steam in coming months'.

According to the PMI survey, production output, employment and stocks of finished goods expanded in September, though at a slower rate. Inventory and imports too kept up expansion, posting higher readings than in August.

The key electronics sector expanded for a sixth straight month, but its reading of 52.4 also slipped from August's, due to slower growth in both local and overseas new orders, and lower production output. The electronic sector's other sub-indices all showed expansion, except input prices, which contracted for a 10th straight month.

Despite that, 'the manufacturing sector is still not decisively out of the woods yet' as much of industrial production in July and August was due to a pharma rebound, cautioned Mr Liew, who was one of many economists to raise GDP forecasts for the rest of this year. He now expects a smaller year-on-year contraction of 2.7 per cent in Q3 than his previous forecast of minus 5.7 per cent.

The more optimistic are in fact expecting positive year-on-year third quarter growth. OCBC's Ms Ling, expects an expansion of 0.6 per cent year-on-year, and Citi economist Kit Wei Zheng expects an even greater 1.5 per cent year-on-year growth in Q3 GDP. In fact, on a seasonally-adjusted annualised basis, Mr Kit forecasts a quarter-on-quarter jump in Q3 GDP of 21 per cent.